khasharmeh and said - 2014 - effects of mandatory audit firm rotation upon quality of audit - the perception of audit firms-evidence from bahrain [marf]

4, 425-441 Effects of Mandatory Audit Firm Rotation Upon Quality of Audit: The Perception of Audit Firms—Evidence From Bahrain Hussein Khasharmeh, Kousay Said University of Bahrain,

Journal of Modern Accounting and Auditing, ISSN 1548-6583

April 2014, Vol 10, No 4, 425-441

Effects of Mandatory Audit Firm Rotation Upon

Quality of Audit: The Perception of Audit

Firms—Evidence From Bahrain

Hussein Khasharmeh, Kousay Said University of Bahrain, Zallaq, Kingdom of Bahrain

The objectives of this study are: (1) to explore current audit appointment practices by audit firms in Bahrain; (2) to look into the opinions of audit firms in Bahrain on potential effects provided by implementing mandatory audit firm rotation (audit quality); and (3) to investigate audit firms’ views in implementing mandatory audit firm rotation in Bahrain To achieve these objectives, a questionnaire was developed and distributed to respondents that consist of all auditors working in audit firms in Bahrain The findings indicated that there is a significant relationship between mandatory audit firm rotation and quality of audit The study also indicated that longer partner tenure makes the auditor’s performance lack the quality in the auditing process The average mean for all questions of the hypothesis together is 2.73 with average standard deviation of 0.94 which is less than half of the mean This means that there is no dispersion among respondents about the questions of the hypothesis Also,

the analysis shows that the t-value is 29.922, which is greater than the table critical value of t (1.66), and the

p-value obtained is 0.000 which is less than the value of significance at p < 0.05 These results confirm

statistically that there is a significant relationship, so the null hypothesis is rejected and the alternative hypothesis

is accepted

Keywords: mandatory audit rotation (MAR), audit quality, partner tenure, Bahrain, Central Bank of Bahrain (CBB),

Gulf Cooperation Council (GCC) countries

Introduction

The concept of mandatory audit rotation (MAR) is not new There has been considerable interest in MAR

as a means of reducing the incidence of audit failure, improving the quality of audit, and protecting investors and other users of financial statements Mandatory audit firm rotation sets a limit on the number of years a public accounting firm may audit a company’s financial statements After a predetermined period, an accounting firm is no longer eligible to serve as the company’s auditor for a set time interval and a rotation of firms is required An MAR rule, which sets a limit on the maximum number of years an audit firm can audit a given company’s financial statements, has been proposed as a means to preserve audit quality as possibly to increase investors’ confidence in financial reports

Hussein Khasharmeh, Dr., Department of Accounting, College of Business Administration, University of Bahrain

Kousay Said, Dr., Department of Accounting, College of Business Administration, University of Bahrain

Correspondence concerning this article should be addressed to Hussein Khasharmeh, Department of Accounting, College of Business Administration, University of Bahrain, P.O Box: 32038, Kingdom of Bahrain Email: hkhasharmeh@hotmail.com

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In the US, the Government Accounting Office (GAO), which was delegated by the Securities and Exchange Commission (SEC) to study the issue of MAR, concluded that there is no clear evidence regarding the potential benefits of an MAR rule (GAO, 2008) However, more recently, the Public Company Accounting Oversight Board (PCAOB, 2011) issued a concept release in which the board solicits public comments on the advantages and disadvantages of mandatory audit firm rotation Horwath (2012) pointed out that 94% of the comment letters received by the PCAOB were against rotation

The auditor will not be burdened from pleasing the client’s management and at the same time will reduce the auditor’s concern over losing the client Mandatory audit firm rotation would require the clients to replace their external auditors at a certain time, usually after a few years Section 207 (c) of Sarbanes-Oxley Act (SOX) defined the term “mandatory rotation” as the imposition of a limit on the period of years in which a particular registered public accounting firm may be the auditor of record for a particular issuer SOX’s reforms directly related to auditors include the establishment of the PCAOB, increased audit committee responsibilities, and mandatory rotation of lead and reviewing audit partners after five consecutive years on an engagement (Arel, Brody, & Pany, 2005) Breeden (2012) believed that companies should re-propose their audit engagement at least once every five or six years

Several prior studies have attempted to draw conclusions of MAR in terms of audit quality The majority

of the published empirical papers are based on settings where mandatory rotation is not in place, with few exceptions which are characterized by some relevant limitations (Ruiz-Barbadillo, Gomez-Aguilar, & Carrera, 2009; Kim & Yi, 2009; Firth, Rui, & Wu, 2012) In December 2011, the American Institute of Certified Public Accountants (AICPA) issued a comment letter that the PCAOB refrains from imposing MAR The AICPA letter supported the PCAOB’s goals for enhancing auditor independence, objectivity, and professional skepticism The AICPA cited research indicating that auditor rotation may hurt audit quality and that audit quality increases with audit firm tenure

Whether audit firm rotation should be made mandatory is an issue that has been debated for almost five decades in the US and around the world (Kwon, Lim, & Simnett, 2010)

Proponents of mandatory audit firm rotation have argued that a new auditor would bring to bear greater skepticism and a fresh perspective that may be lacking in long-standing auditor-client relationships

It is suggested in the literature that a policy of MAR could undermine accretion of expertise and impair audit quality The relationship between audit tenure and audit quality remains controversial Many believe that the longer the audit tenure, the lower the audit quality (negative correlation) due to the closer relationship between auditors and management (Catanach & Walker, 1999; Vanstraelen, 2000) This closer relationship creates more flexibility for the management to produce financial statements in the auditor’s favor (Davis, Soo,

& Trompeter, 2002), while others believe that the longer the audit tenure, the higher the audit quality (positive correlation) (Geiger & Raghunandan, 2002)

According to PricewaterhouseCoopers (PwC, 2012), MAR will reduce audit and financial reporting quality Mandatory audit firm rotation would diminish audit quality, make financial reporting less reliable, and add cost for investors Ernst & Young (2013) believed that mandatory audit firm rotation has not proven to enhance audit quality; indeed, some studies have shown that it may adversely affect audit quality especially where there are shorter rotation periods (Cameran, Prencipe, & Trombetta, 2013)

Burton and Roberts (1967) suggested that personal relationship between auditor and management, the combination of auditing and consulting, as well as the auditor’s goal of maintaining the assignment are

determining factors towards reducing audit quality

Deis and Giroux (1996) reviewed audit quality letters produced by a public agency and concluded that audit quality declines as audit tenure increases

However, others believe that through audit firm tenure, the auditor attains a significant knowledge and understanding of a company over time, as well as an awareness of its risks, all of which can enhance audit quality Longer tenure can allow the audit firm to develop experience and credibility with the entity by demonstrating, over time, its technical accounting expertise, the quality of its audit, work, and its knowledge of the company’s business

However, despite concerns that mandatory rotation could diminish the quality of financial reporting, the demand for mandatory audit firm rotation has remained

Thus, based on the above discussions, the problem statement of the study can be highlighted from the point that the audit function is to provide reliable financial information to the interested users such as shareholders, creditors, lending institutions, and others for decision-making The users must be confident in relying on the financial information However, a number of recent corporate reporting failures, such as Enron and WorldCom, have raised concerns over the credibility of financial information

To the best of our knowledge, this is the first exploratory survey conducted in Bahrain regarding the current audit appointment practices by audit firms in Bahrain and evaluating their perceptions of the potential effects provided by implementing mandatory audit firm rotation requirement It is hoped that this study will provide some viewpoints of the interested parties in determining whether audit firm rotation should be mandated in Bahrain, and its effects upon audit quality, and to contribute to the international debate about the requirement that some companies have to rotate their independent auditors periodically

In the light of the above discussion, the current study aimed to explore whether mandatory audit firm rotation should be implemented in Bahrain considering that some countries have had good experiences such as Italy This study investigated the potential effects of such a requirement on the related party “audit firms” in Bahrain

Specifically, the objectives of this study are:

(1) To explore current audit appointment practices by audit firms in Bahrain;

(2) To look into the opinions of auditing firms in Bahrain on potential effects provided by implementing mandatory audit firm rotation (audit quality);

(3) To investigate their views in implementing mandatory audit firm rotation in Bahrain

By attaining such objectives, the current study is expected to contribute to the literature in the following issues:

(1) To fill the gap in the existing economics of auditing literature, since there are little published research papers directly testing mandatory audit firm rotation in developing countries and specifically Gulf Cooperation Council (GCC) countries such as Bahrain;

(2) To the best of our knowledge, it is the first study that explicitly examines the impact of mandatory audit firm rotation upon audit quality in Bahrain;

(3) This study is expected to have useful implications for regulators, members of the accounting profession, and users of financial statements as a contribution to prior research, and this study investigates two main hypotheses to support or refute prior findings regarding mandatory audit firm

The remainder of this study is organized as follows: Section 2 provides the controversy and literature review about mandatory audit firm rotation; Section 3 deals with the Bahrain auditing environment; Section 4 presents methodology (data collection, population of the study, and hypotheses testing); Section 5 presents the statistical analysis and findings of this study; and Section 6 highlights the conclusions and recommendations

Controversy and Literature Review

Many studies have been conducted in the area of mandatory audit firm rotation (Mautz & Sharaf, 1961; Pierre & Anderson, 1984; Dopuch, King, & Schwartz, 2001; Gietzman & Sen, 2002; Davis et al., 2002; Geiger

& Raghunandan, 2002; Carcello & Nagy, 2004; Kaplan, 2004; Arel et al., 2005; Chi, Huang, Liao, & Xie, 2005; Gavious, 2007; Wibowo & Rossieta, 2009)

According to previous studies, there are two conflicting arguments about the relationship between audit tenure and audit quality The first argument states that the period of audit engagement is negatively related to the audit quality This is due to the closer relationship between auditor and client as the audit period is longer This closer relationship causes the auditor and the client to have a chance to compromise amounting and reporting method This decreases the audit quality The second argument states that the period of audit engagement is positively related to the audit quality The longer the tenure, the better the audit quality Regulators have suggested a link between auditor tenure and reductions in earnings quality and recommended imposing such a requirement (Commission on Auditors’ Responsibilities, 1978; Division for CPA firms, 1992) The positive audit-client relationship is due to several reasons as follows: (1) There are more audit failures and lawsuits in the early years of audit engagement The major financial reporting failures at Enron and WorldCom

as well as apparent failures at Quest, Tyco, Adelphia, and others led to the financial reporting reforms contained in the SOX of 2002 Many of the audit failures and legal issues occur in the early years of audit engagement, and thus, the longer the tenure, the better the audit quality (Pierre & Anderson, 1984) The analysis of Geiger and Raghunandan (2002) showed that most audit failures occur in the early years of audit engagement, and thus, longer audit tenure will improve the audit quality Carcello and Nagy (2004) proposed that the probability of fraudulent financial reporting is the highest early in the audit firm’s tenure and is not substantially higher for instances of long-standing audit engagement; and (2) Audit rotation causes audit risk, below standard audit implementation, because an auditor has not comprehensively understood his/her clients (Beatty, 1989; Craswell, Francis, & Taylor, 1995)

The audit quality is the combination between the auditor’s competence and independence (DeAngelo, 1981) The relationship between the auditor’s competency and tenure is predicted to be positively related The longer the tenure, the higher the auditor’s competency as the auditor gets a better understanding of the firm’s internal control, accounting information system, and specific risks

However, other views were adopted, in which auditing profession has argued that mandatory audit firm rotation would not only decrease audit quality but also reduce auditor’s incentives to invest in specific industries, destroy the knowledge of client companies that an audit firm usually accumulates over the period of years, distort the competition in the market, and increase the cost of an audit (AICPA, 1992)

GAO’s (2003) study concluded that mandatory audit firm rotation may not be the most efficient way to improve audit quality

It appears from the literature that politicians, regulators, analysts, and small audit firms favor mandatory audit firm rotation as a solution to the perceived lack of objectivity and independence of auditors, whereas

academicians, companies, and large audit firms tend to be against mandatory audit firm rotation, because changing auditors is costly (Kwon et al., 2010)

According to the literature review and based on the above discussion, the arguments in favor of mandatory audit firm rotation can be summarized as follows:

(1) If auditors continue to audit the entity for too long, they risk developing too close a relationship with the client;

(2) Periodically having a new auditor would bring a fresh look to the public company’s financial reporting and help the auditor appropriately deal with financial reporting issues, because the auditor’s tenure would be limited under MAR;

(3) Mandatory audit firm rotation would help in the more even development of the auditing profession, helping smaller and medium-sized audit firms to grow

The arguments against mandatory audit firm rotation can be summarized as follows:

(1) New auditors may miss problems in the period under review, because they lack adequate experience with the client to notice either unusual events or important changes in the client’s environment;

(2) There are not enough large audit firms to address the audit requirements of large companies, making auditor rotation impracticable at the ground level;

(3) Mandatory rotation increases the risk of audit failure, because the incoming auditor places increased reliance on the client’s estimates and the representations in the initial years of the engagement Thus, there may

be negative effects on audit quality and effectiveness in the first years following a change;

(4) The rotation would only prevent auditors from building an in-depth institutional knowledge of a client and its business

Without empirical evidence, it is neither clear whether mandatory rotation would really ensure audit quality by strengthening auditor independence nor obvious whether the rotation rule would hamper audit quality because of an insufficient knowledge of clients Therefore, any generalization of such findings to a regime with MAR should be implemented with caution

Because this study aims to examine the effects of mandatory audit firm rotation upon audit quality, we will consider the previous studies about audit quality

MAR and Audit Quality

Audit quality is an important feature to consider in evaluating the usefulness of the rotation rule The quality of audit can be defined as the probability that an auditor will both discover and truthfully report material errors, misrepresentations, or omissions detected in a client’s accounting system (DeAngelo, 1981) The quality

of audit work can be evaluated from several points of view The main factors that can be considered in evaluating the audit quality are as follows (Cameran, Vincenzo, & Merlotti, 2005):

(1) Performance determinants: They relate to the ability of auditors, intended both as knowledge (training, education) and experience (professional, industry, and client-specific);

(2) Economic incentives: As the audit firm’s performance is affected by economic considerations (i.e., fees, costs, profits), these incentives have to be evaluated when both detection and reporting of matters are analyzed;

(3) Audit market structure: The auditor’s performance is influenced by the state of professional ethics and the visibility of the profession’s enforcement actions

The proponents of MAR consider it as a way to improve audit quality, because the familiarity with the client has the effect of reducing the fresh point of view that auditors have in the first years of the engagement The rotation can lead the market to completion based on the quality of services which can lead to a growth in the number of competent firms Gates, Lowe, and Reckers (2007) argued that auditor rotation increases investors’ confidence in the quality of financial accounting in a regulatory environment with increased corporate governance producers Also, Carey and Simnett (2006) proved that the auditing quality decreases with increasing duration of the assignment and increases with internal rotation According to the opponents of mandatory rotation, these benefits are largely unproven and they cannot balance the costs and risks of it Ernst & Young (2013) and PwC (2012) opposed mandatory firm rotation They believed that mandatory firm rotation is not an effective way to enhance audit quality Geiger and Raghunandan (2002) added that long auditor tenure is not associated with a decline in audit quality but that short tenure is associated with lower quality audit

The following are some of the previous studies about audit quality

Copley and Doucet (1993) conducted a study to investigate the relationship between the quality of audit services and auditor tenure, along with the quality/fixed fees relation The empirical results show a positive sign for the estimated parameter of “tenure” This means that the longer the period of engagement, the higher the risk that the quality of audit services decreases The authors concluded that a periodic rotation of auditors may improve the audit quality

Vanstraelen (2000) focused, in his study, on the audit-client relationship and the quality of audit in practice The results showed that companies receiving a clean audit report have a significantly longer relationship with the auditors than companies that receive an unclean report So, a long tenure reduces the likelihood that the auditor issues a qualified report

Johnson, Khurana, and Reynolds (2002) investigated, in their study, whether audit firm tenure is associated with financial reporting quality They examined the properties of accruals for an industry and size-matched sample of big 6 clients that have been audited by the same firm for two to three years (short tenure), four to eight years (medium tenure), or nine or more years (long tenure) The results showed that relative to medium audit firm tenures of four to eight years, short audit firm tenures of two to three years are associated with lower quality financial reporting There was no evidence of reduced financial reporting quality for longer audit firm tenures of nine or more years

J N Myers, L A Myers, and Omer (2003) investigated the relationship between audit tenure and audit quality The authors used discretionary accruals and current accruals as proxy variables for audit quality The authors found that extended auditor tenure had a beneficial effect on the dispersion of accruals The results suggest that audit quality does not appear to deteriorate with tenure

Carcello and Nagy (2004) examined the relationship between audit quality and mandatory rotation from the point of view of fraudulent financial reporting The authors found a significant positive relationship between short auditor tenure and the number of fraudulent financial reports, but they did not discover a significant positive relationship between long auditor tenure and fraud As fraud is more likely to occur in the first years of the auditor-client relationship, mandatory rotation can have negative effects on audit quality Therefore, fraudulent management can be perceived and reduced, and the audit quality improves

Fitriany, Utam, Martani, and Rossieta (2009) found that tenure is significantly and negatively related to the discretionary accruals In the first year of audit engagement, the audit quality is still low due to fact that the

auditor has not comprehensively understood the client’s situation The longer the tenure (second or third year), the audit quality increases

Fitriany et al (2009) conducted a study to investigate whether the audit firm rotation regulation is required to increase audit quality because at present, many countries no longer apply the audit firm rotation The study also examined whether the audit tenure and specialization affect the audit quality The results of the study revealed that audit firm tenure at pre-regulation is negatively related to audit quality, but at post-regulation convexly related to the audit quality (going down until 10 years and then going up) Audit firm rotation at the pre-regulation will decrease the audit quality, but after regulation does not affect the audit quality At pre- and post-regulation periods, audit partner rotation positively affects the audit quality The study concluded that the rotation regulation has not made any impact on audit quality These results indicate that audit firm rotation does not improve audit quality, so it should be stopped, while audit tenure rotation is still needed

Harris (2012) conducted a study to investigate whether MAR rules are associated with changes in the quality of audit markets The study also investigated the debonding effect of an MAR policy (i.e., debonding is goal of rotation rules in an effort to enhance auditor independence in audit markets) The study found that in the sample period after adoption of MAR rules, the data show evidence of less earnings management, less managing

to earnings targets, and more timely loss recognition compared to the sample before adopting MAR rules The study concluded that the quality of audit markets appears to improve, on average, since the enactment of MAR rules The results highlight the importance of considering ways to mitigate the erosion of audit quality when making the transition to new auditors under MAR rules The study suggested ways that include the use of detailed handover files between predecessor and successor audit firms or “four-eyes principle” (two-auditor involvement) in years of initial audits

Siregar, Amarullah, Wibowo, and Anggraita (2012) pointed out, in their study, that the Indonesian regulators have made it compulsory to rotate the appointment of the public accountants every three years and the appointment of public accounting firms every five years, since the end of 2003 The study aimed to investigate the effects of auditor rotation and auditor tenure of the public accountants and the public accounting firms, on audit quality (before and after the implementation of the mandatory auditor regulation) The results do not support that the MAR increases audit quality or that shorter audit tenure increases audit quality They recommended that regulators may need to consider revising the regulation or introduce other regulations to increase audit quality

Cameran et al (2013) pointed out, in their study, that auditors are appointed in Italy for a 3-year period and their term can be renewed twice up to a maximum of nine years They added that since the auditor has incentives

to be reappointed at the end of the first and the second 3-year periods, audit quality is expected to be higher in the third (i.e., the last) term compared to the previous two The study revealed that the auditor becomes more conservative in the last 3-year period, i.e., the one preceding the mandatory rotation In an additional analysis, the researchers use earnings response coefficient as a proxy for investors’ perceptions of audit quality, and the results were consistent with an increase in audit quality perception in the last engagement period

In summary, so far, the extant literature, although very broad, was unable to provide direct and univocal empirical evidence in support of or against the introduction of an MAR rule There is a clear need to research this issue further in settings where the MAR rule is already in place and where the actual incentives of the auditor become more evident Thus, our paper aims at partially filling this gap

The Bahrain Auditing Environment

Auditors and Accounting Standards Module was first issued in October 2010 under powers given to the Central Bank of Bahrain (CBB) Specialized licensees must ensure that the audit partner responsible for further audit does not undertake that function more than five years in succession For purpose of Paragraph AA-1.3.1, the first 5-year period referred to is for period ending December 31, 2010 Specialized licensees must notify the CBB of any change in audit partner (CBB, 2010)

Auditors appointed by specialized licensees must be independent (cf Sections AA-1.4 and AA-1.5, CBB, 2010) Auditors who resign or are otherwise removed from office are required to inform the CBB in writing of the reasons for the termination of their appointment (Section AA-1.2, CBB, 2010)

The appointment of auditors normally takes place during the course of the firm’s annual general meeting, and specialized licensees should notify the CBB of the proposed agenda The CBB’s approval of the proposed auditor does not limit in any way shareholders’ rights to subsequently reject the board’s choice The CBB, in considering the proposed (re-)appointment of an auditor, takes into account the expertise, resources, and reputation of the audit firm, relative to the size and complexity of the licensee Specialized licensees must notify the CBB as soon as they intended to remove their external auditors Specialized licensees must ensure that a replacement auditor is appointed (subject to CBB approval), as soon as reasonably practicable after a vacancy occurs, but no later than three months

According to Article AA-1.2.3 (CBB, 2010), the external auditor of specialized licensees must inform the CBB in writing, should it resign or its appointment as auditor be terminated, within 30 calendar days, of the event occurring, setting out the reasons for the resignation or termination

Article AA-1.3.1 states that unless otherwise exempted by the CBB, specialized licensees must ensure that the auditor partner responsible for their audit does not undertake that function more than five years in succession (CBB, 2010)

Article 61 (d) of the CBB law imposes conditions for the auditor to be considered as independent Before a specialized licensee appoints an auditor, it must take responsible steps to ensure that the auditor has the required skills, resources, and experience to carry out the audit properly, and is independent of the licensee (AA-1.4.1, CBB, 2010)

For an auditor to be considered as independent, it must, among other things, comply with the restrictions

in Section AA-1.5 in that specialized licensees must not provide regulated services to their auditor (CBB, 2010)

Article 217 (c) prohibits an auditor from: (1) being a chairman or a member of the board of directors of the licensee he/she audits; (2) holding any managerial position in the licensee he/she audits; and (3) acquiring any shares in the licensee he/she audits, or selling any such shares he/she may already own, during the period of his/her audit Furthermore, the auditor must not be a relative (up to the second degree) of a person assuming management or accounting duties in the licensee (AA-1.5.4, CBB, 2010)

These arguments may be applied and/or linked to Bahrain In the light of the increasing focus on the stock exchange market of Bahrain as an important avenue for attracting foreign investments and to encourage local residents to invest in shares, Bahraini companies may engage in mandatory audit firm rotation as a means to enhance the quality of audit And this will help to enhance the company’s ability to raise capital at the lowest cost possible (Healy & Palepu, 1993; Lev, 1992)

The motivation of the current study evolved for a number of reasons First, most of the literature on audit

firm rotation focuses on developed countries The current study, therefore, addresses this issue in developing

countries, the case of Bahrain Second, as far as the current researchers are aware, no such study was carried

out with a special reference to Bahrain The results of this study are hoped to increase knowledge about how

listed companies and audit firms in Bahrain reflect MAR through their reporting practices Third, because

Bahrain is a member of GCC countries, it shares a number of specific structural economic features Key

common features of GCC countries are: a high dependency on oil as expressed in the share of oil (and gas)

revenues in total fiscal and export revenues; young and rapidly growing national labor forces; and the heavy

reliance on expatriate labor in the private sector In addition, listed companies are subjected to similar reporting

requirements The companies’ laws in these countries require all legal entities to submit an annual report which

includes a director’s report, auditor’s report, and financial statements, and to have their accounts prepared in

accordance with the International Financial Reporting Standards (IFRS) Thus, GCC countries are expected to

benefit from the results of the current study

Research Methodology Development of Research Hypotheses

To accomplish the objectives of this research and in the light of the findings drawn from previous studies,

together with what have been discussed above under literature review and Bahrain auditing environment, we

formulate the following research hypotheses for the current study:

H0: There is no significant relationship between mandatory rotation of external auditors and audit quality

H1: There is a significant relationship between mandatory rotation of external auditors and audit quality

Population and Sample of Study

The population of this study consists of all auditors who are working in audit firms in Bahrain and are

allowed to practice audit process through Audit Accounts Offices in Bahrain The number of audit firms is

about 25 One hundred and two questionnaires were distributed, and 66 questionnaires were filled by the

respondents and returned to us The response rate is 64.7%

Data Collection

To achieve the objectives of this study and in the light of literature review and theoretical background, a

questionnaire was developed The questionnaire comprises three sections Section one contains some

demographic information and the current audit practices; section two includes questions about potential effects

of mandatory audit firm rotation upon audit quality; and section three comprises questions about overall

opinions on requiring mandatory audit firm rotation The questions in questionnaire are measured using a

5-point Likert scale, where 1 refers to “strongly agree”, 2 refers to “agree”, 3 refers to “indifferent”,

4 refers to “disagree”, and 5 refers to “strongly disagree” (A copy of the questionnaire is available upon

request)

Reliability of Study Tool

To proof the reliability of the study tool, we gave a copy of the questionnaire to many accounting

professors in Bahrain University and other universities both in and outside Bahrain Also, some copies of the

questionnaire were given to auditing professionals in Bahrain In addition, the questionnaire is given to some

academic professors who are specialized in statistics All their notes and comments were taken into

consideration before we finalized the questionnaire

Internal Consistency of the Questionnaire’s Reliability

The internal consistency of the questionnaire’s reliability was measured by using Cronbach’s coefficient

alpha statistical test as shown in Table 1 The analysis provides an indication of the average correlation among

all the items that made up the scale The results in Table 1 demonstrate that all indices obtained were

considered to be high (above 0.70) A sample scale that shows an alpha value above 0.70 is considered as

reliable (Bryman & Cramer, 2001) Therefore, the indices for the questionnaire’s reliability are generally

considered as adequate for this research

Table 1

Reliability Statistics

Cronbach’s alpha Cronbach’s alpha based on standardized items No of items

Statistical Analysis Descriptive Analysis

Descriptive analysis regarding demography variables is shown in Table 2

Table 2

Distribution of Respondents According to Demography Variables

Experience

Qualification

Certified Public Accountant (CPA)/Chartered Accountant

(CA)/Association of Chartered Certified Accountants (ACCA)/Chartered

Financial Analyst (CFA)/Certified Management Accountant (CMA)

Company’s auditor

No of employees

It is shown in Table 2 that 63.6% of the respondents have five years and over experience, and this result

indicates the extent of experience and maturity that may be reflected positively upon the work Table 2 also

shows that the majority of the respondents (66.7%) have professional certificates, followed by B.S.C with